Seems like an issue which just won’t go away – the question of whether a worker bee is an employee, or an independent contractor. Makes a big difference in how the bloke reports his expenses. If he’s an employee, those expenses go on Schedule A as itemized deductions, and are likely to be subjected to some limitations in the deductible total. If he’s a contractor, the expenses go on his Schedule C, and further any net profit he reports there can qualify him for retirement plan deductible conributions as well.
So here comes taxpayer Jorge Quintanilla who, the Court notes, is an exceptionally skilled production worker on approximately 150 commercials shot in Southern California. Jorge believed he qualified as a contractor and reported his expenses on Schedule C as noted above. The Court further notes that the legal distinction between an independent contractor and a common-law employee is settled as a general matter, though it’s often murky in application. Courts of various stripes, however, have set forth certain factors over the years, intended to guide one to the proper conclusion as to employee versus contractor, including:
- The degree of control exercised by the principal over the worker.
- The worker’s investment in his workplace.
- The worker’s opportunity to make a profit or suffer a loss.
- Whether the principal can fire him.
- Whether the workplace is part of the principal’s regular business.
- The permanency of the worker’s relationship with the principal.
- The relationship the parties believed they were creating.
- Whether the principal provides employee benefits.
In short, the essential question boils down to “who tells whom to do what?”
After examining all of the facts, the Court concluded that Quintanilla was an independent contractor, in the tax year in question, noting that “The most important (fact) is that Quintanilla had a large degree of control as to how to accomplish the tasks he had to do throughout the year.” He had a large degree of independence in determining how to accomplish his work, provided all of his own tools (in which he had invested heavily) and, depending on the outcome of his work, could have earned a profit or suffered a loss.
Check out the facts carefully in your situation, if you face this question. The Revenooers just love to find would-be contractors who are truly (in the government’s eyes) employees, and slap the employers with all of the payroll taxes accordingly!
CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation.
Jeff Quinn, the author of this article, is a CPA, retired from the firm of Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He welcomes comments at firstname.lastname@example.org.